Financial Impact from the Shanghai FTZ
Eiichi Sekine
Chief Representative, Beijing Representative OfficeNomura Institute of Capital Markets ResearchI.

The decision to establish and run the China (Shanghai) Pilot
Free Trade Zone

1. The China (Shanghai) Pilot Free Trade Zone began operating on 1 October
2013
At its 4th meeting on 30 August 2013, the Standing Committee of the 12th
National People's Congress (equivalent to Japan's Diet) authorized the State Council
to modify laws related to foreign capital in preparation for establishing the China(Shanghai) Pilot Free Trade Zone (Shanghai FTZ)1. The Shanghai FTZ is comprisedof four special customs supervision areas within Shanghai's Pudong district: (1)Shanghai Waigaoqiao FTZ, (2) Shanghai Waigaoqiao Logistics FTZ (3) Yangshan
Free Port, and (4) Shanghai Pudong Airport FTZ, covering a total area of 28.78 km2.
This decision suspends for a period of three years from 1 October 2013 legislation
affecting 11 areas in which investments by foreign corporations are examined, thereby
launching Shanghai's free trade experiment.

2. Six service sectors will be opened to foreign competition on a trial basis
It is worth noting that only six months passed between Premier Li Keqiang's initialinspection visit of Shanghai and launch of the Shanghai FTZ. In the interim, the StateCouncil approved the general scheme for the Shanghai FTZ, in principle on 3 July2and formally on 17 August, after which it was announced by the Commerce Ministryon 22 August3. Then on 27 September, the State Council announced in its Notice
regarding Publishing the General Scheme of the China (Shanghai) Pilot Free Trade
Zone4 that it planned to open six service sectors and 18 service businesses to foreign
firms: (1) financial services, (2) shipping services, (3) commercial and trade services,(4) professional services, (5) cultural services, and (27) social services sectors(education, job training, and healthcare).
After this, a ribbon-cutting ceremony for the Shanghai FTZ was held on themorning of 29 September, and the organization administering the FTZwas given its
1
2
3
4

1

China Daily, dated 30 September 2013.
See http://www.gov.cn/ldhd/2013-07/03/content_2439909.htm (in Chinese)
See http://www.mofcom.gov.cn/article/ae/ai/201308/20130800262548.shtml (in Chinese)
See http://www.gov.cn/zwgk/2013-09/27/content_2496147.htm (in Chinese)

Nomura Journal of Capital Markets Winter 2014 Vol.5 No.3

formal name, the China (Shanghai) Pilot Free Trade Zone Administrative Committee5.
The Committee is headed by Ai Baojin, who is also the vice mayor of the City of
Shanghai. That afternoon, the central government (including the Ministry ofCommerce) and Shanghai's municipal government held a press conference to explain
future policy. Coinciding with the Shanghai FTZ opening ceremony, 36 companies,
including 11 banks (noted below), announced they would establish operations in the
FTZ.

II. Shanghai FTZ overview and the testing of financial services
1. Overview of the Shanghai FTZ
According to the series of announcements noted above, the pilot FTZ will first of
all take on the government's role over the next 2 to 3 years. This signifies an easing of
regulations governing corporate activity. In principle, corporate activity within the
Shanghai FTZ will change from an ex ante inspection and approval process to an ex
post supervision and monitoring system.
Secondly, China's inbound foreign direct investment (FDI) will be managed using anegative list approach. This means a loosening of the FDI regime, currently based on
pre-approval, and a liberalizing of investment, in principle by eliminating sectorspecific restrictions and instead applying restrictions on an exceptional basis.
Thirdly, it provides innovations to the open-door model, namely prior tests of afurther opening of service sectors to foreign firms as well as efforts to make it easierfor global firms to conduct trade and operate regional headquarters.
These tests are analogous to Japan's plan to establish national strategic zones, acomponent of its growth strategy encompassing significant deregulation for limited
geographic regions, but in China's case the tests are limited to the services sector anda single geographic area in Shanghai's Pudong district.

2. The thinking behind testing financial services
One of the main targets of the Shanghai FTZ is the opening to foreign competitionof financial services. The roadmap for testing financial services in the Shanghai FTZ
includes speeding up the transition to freely convertible capital accounts andcompletely opening financial services.
The State Council Notice notes two types of financial services tests, theacceleration of innovation in financial systems and the strengthening of financial
service functions (Figure 1). It appears that the former primarily consists of financial
liberalization, while the latter looks at how the players are going to implement thatliberalization.
5

The China (Shanghai) Pilot Free Trade Zone Administrative Committee now has its own
website in English: http://en.shftz.gov.cn/

Financial Impact from the Shanghai FTZ

2

Figure 1: Testing financial services in the Shanghai FTZ
Category

Details①②③

Accelerating
innovation offinancialsystems④⑤⑥

Make financial
services morefunctional

On the assumption that this control is possible, conduct advanced tests of the freeconvertibility of yuan-denominated capital accounts, the liberalization of interest
rates in financial markets, and yuan- denominated cross-border transactions.
Use market-based price formation for financial institution assets.
Turn globally in search of ways to test the reform of exchange-rate controls, build
an exchange-rate regime suitable to pilot FTZs, and comprehensively facilitate
trade and investment.
Encourage companies to use both domestic and overseas resources and markets
and liberalize cross-border funding methods.
Reform the model for managing foreign debt and make the cross-borderprocurement of funds easier.
Deepen tests of global companies' concentrated management of foreign currencydenominated funding and encourage those companies to establish local or global
funding management centers.

⑦

Reform the financial system of the pilot FTZ and build a mechanism to link it withthe construction of a Shanghai international financial center.

①

Encourage the comprehensive opening of the financial services business to foreign
financial institutions and private-sector capital that meets certain conditions andsupport the establishment of foreign capitalized banks and Chinese-foreign bankjoint ventures in the pilot FTZ.

②
③
④
⑤
⑥

Allow financial markets to establish global trading platforms within the pilot FTZ.
Allow foreign firms to participate in commodity futures trading on a phased-in basis.
Encouraging the innovation of financial market products.
Assist stock custodial and trading organizations in establishing comprehensive
financial services trading platforms within the pilot FTZ.
Assist in the development of the cross-border, yuan-denominated reinsurance
business.

Note:

Based on the Notice regarding Publishing the General Scheme of the China(Shanghai) Pilot Free Trade Zone dated 18 September 2013 and promulgated on 27
September 2013.
Source: Nomura Institute of Capital Markets Research, based on data from the State Council

A second element contained in the State Council Notice is an easing of regulations
governing the establishment of financial institutions involved in the tests (Figure 2).
Thirdly, in the banking industry's response to the State Council Notice, the China
Banking Regulatory Commission (CBRC) published on 28 September 2013 its Noticefrom the CBRC on Banking Regulation in China (Shanghai) Pilot Free Trade Area6,
wherein it outlined its plans within the FTZ concerning (1) support for thedevelopment of Chinese-capitalized banks, (2) support for establishing nonbanks, (3)management support for foreign banks, (4) support for participation in the privatelycapitalized banking industry, (5) support for the opening of cross-border lending
businesses, (6) support for opening offshore services, (7) a simplification of ways toparticipate, and (8) systemic improvements to the regulatory oversight of services.

6

See http://www.cbrc.gov.cn/EngdocView.do?docID=3B8AD3A67F854E0D9E6BDBD8A9BDC803

3

Nomura Journal of Capital Markets Winter 2014 Vol.5 No.3

Figure 2: Details of financial sector tests in the Shanghai FTZ
Affected
services

SectorDetails

①
Banks

②

Financialservices
Insurance

・①

Financial leasing②
Specialized
services

Corporate credit
research
Investment
management

・・

Establishment of foreign-capitalized banks by qualified foreign
financial institutions.
Establishment of Sino-foreign joint venture banks by qualified
private-sector capital and foreign financial institutions.
The timely establishment on a trial basis of partially licensed banks
when conditions are met.
On the assumption that administrative rules are in place andeffective regulatory oversight is strengthened, allow qualified
Chinese banks to handle offshore business.
Establish on a trial basis foreign-capitalized institutions specializingin health insurance.
Do not apply a minimum registered capital requirement when afinancial leasing company establishes a subsidiary to lease a single
aircraft or ship.
Allow financial leasing companies to also offer factoring services
related to their main business.
Allow the establishment of foreign-capitalized credit researchcompanies.
Allow the establishment of foreign-capitalized joint stockcompanies.

Note:

Based on the Notice regarding Publishing the General Scheme of the China(Shanghai) Pilot Free Trade Zone dated 18 September 2013 and promulgated on 27
September 2013.
Source: Nomura Institute of Capital Markets Research, based on data from the State Council

Fourth, in the securities industry's response, the China Securities Regulatory
Commission (CSRC) published on 29 September its Policy Measures for the CapitalMarket to Support and Promote the Shanghai Free Trade Zone7, including (1) energy
futures products, (2) cross-border investment in securities and futures by firms(financial institutions and corporations) and individuals, (3) the issuance of yuandenominated bonds by overseas parent companies (nonresidents), (4) establishingsubsidiaries of securities and futures companies, and (5) the OTC trading ofcommodity futures and derivatives.
We look next at the specifics and the significance of the major financial services
tests scheduled, based on the announcements made by the government.

3. Specifics of the financial services tests
1) Accelerating the innovation of financial systems(1) The market-oriented reform (liberalization) of interest rates
The State Council Notice includes a plan for testing interest rate liberalization in
the Shanghai FTZ. That plan was also confirmed in Article 21 of the Measures for the
Administration of the China (Shanghai) Pilot Free Trade Zone , promulgated by7

See http://www.csrc.gov.cn/pub/csrc_en/newsfacts/release/201311/t20131126_238765.htm

Financial Impact from the Shanghai FTZ

4

Shanghai's metropolitan government on 29 September and implemented 1 October
20138.
Interest rates in China's interbank market (money market) and bond market havealready been liberalized, leaving only deposit and loan rates that are regulated. Of
those, there are no longer restrictions on yuan-denominated loan rates, for which theceiling was abolished in October 2004 and the floor was abolished in July 2013. The
deposit-rate ceiling was made variable in October 2004, and the variability band was
widened in June 2012 to an upper limit of 1.1X the benchmark rate.
Because of the large impact that the liberalization of deposit rates would have on
financial institutions, we expect it to be phased in, beginning with the deposits oflarge customers. The People's Bank of China (PBOC) indicated on 26 September
2013 that it would begin by allowing the resumption of certificate of deposit (CD)issuance9, putting the spotlight on future tests aimed at liberalizing rates within the
Shanghai FTZ.

(2) Liberalizing yuan-denominated capital accounts (assuming risk controls)
The State Council Notice contained proposals for liberalizing yuan-denominatedcapital accounts, as did Articles 20 and 22 of the City of Shanghai's FTZ Measures. In
concert with that, both the CBRC and the CSRC also announced the direction of theirpolicies for liberalizing yuan-denominated capital accounts. Consequently, market
participants expect the Shanghai FTZ tests could impart significant momentum to the
yuan's globalization.

<Banking sector>
In the banking sector, the CBRC's measures aim first of all to support the provisionof financial services related to cross-border lending and cross-border investing in the
Shanghai FTZ.
Secondly, as already noted, there are plans to eliminate within the Shanghai FTZ
rules preventing Chinese banks from offering offshore services. A big question in thisregard is to what extent restrictions on the movement of yuan between onshore (theChinese mainland) and offshore, particularly the "real demand" requirement, will beeased.
Third, related to the establishment of foreign banks and Sino-foreign bank joint
ventures as described below, the PBOC on 10 October 2013 published a notice
allowing nonresident investors with regulatory approval to make yuan-denominatedinvestments in domestic financial institutions, including through new establishments,

89

See http://www.shanghai.gov.cn/shanghai/node2314/node2319/node12344/u26ai37037.html(in Chinese)
See http://www.pbc.gov.cn/publish/goutongjiaoliu/524/2013/20130926165920072575593/
0926165920072575593_.html (in Chinese)

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Nomura Journal of Capital Markets Winter 2014 Vol.5 No.3

capital increases, acquisitions, and equity participation10. This should make it easierfor nonresident investors to make yuan-denominated investments in domestic
financial institutions.

<Securities sector>
In the securities sector, the CSRC aims to deregulate investment in cross-bordersecurities and futures by firms (financial institutions and corporations) and individuals
who meet certain conditions.
First, financial institutions and companies in the Shanghai FTZ will be allowed to
trade on Shanghai's securities and futures exchanges. The State Council Notice calls
for phasing in foreign firms' participation in commodities futures trading.
Second, nonresident individual investors who work in the Shanghai FTZ and meetcertain conditions will be allowed to open nonresident individual domestic investment
accounts with securities and futures companies within the Shanghai FTZ, throughwhich they will be able to invest in domestic securities and futures. The restriction on
investing in A shares by mainland residents with Hong Kong, Macau, or Taiwan
nationality was removed in April 2013, and this will be broadened to include
nonresidents of all nationalities, and for the first time will also be expanded to include
investments in futures.
Third, financial institutions and corporations within the Shanghai FTZ will beallowed to invest in overseas securities and futures. This marks the first time that
corporations are eligible to become qualified domestic institutional investors (QDII).
Fourth, individuals working in the Shanghai FTZ and meeting certain conditions
will be allowed to invest in overseas securities and futures. One of the key financial
reforms that the State Council focused on in 2013 was establishing rules allowing for
qualified domestic individual investors (QDII2), and this will be tested in the
Shanghai FTZ. Thus individual investors in the Shanghai FTZ will be allowed tomake foreign investments before individual investors in other regions of China.

2) Make financial services more functional<Banking sector>(1) Establishing foreign banks and Sino-foreign joint venture banks
In the banking sector, qualified financial institutions will be allowed to establish
foreign banks, and private-sector capital meeting certain conditions will be able toestablish joint venture banks with foreign financial institutions, in the Shanghai FTZ.
Although the CBRC measures for the establishment of foreign banks are
predicated on certain conditions being met, in the Shanghai FTZ, branches can be10

See http://www.pbc.gov.cn/publish/huobizhengceersi/3131/2013/201310101517405829362
77/20131010151740582936277_.html (in Chinese)

Financial Impact from the Shanghai FTZ

6established and sub-branches (offices affiliated with a branch) can be promoted tobranches. Additionally, they have been looking at shortening the period required toconvert a foreign bank's representative office to a branch and shortening the length oftime that foreign banks must be in business before handling yuan-denominatedservices. In the public comment version of its law related to authorizing operations byforeign banks published on 30 September 201311, the CBRC proposed shortening thelength of time that Hong Kong, Macau, and Taiwan banks must do business on the
Chinese mainland before they can apply for authorization to provide yuandenominated services. How this is handled in the Shanghai FTZ will be closely
watched.
In regards to the establishment of Sino-foreign joint venture banks, currently when
foreign financial institutions invest in a Chinese-capitalized bank, each foreigncompany is limited to an ownership stake of 20% per company, with an overall cap on
foreign ownership of 25%. In the Special Administrative Measures (Negative List) on
Foreign Investment Access to the China (Shanghai) Pilot Free Trade Zone (2013)
announced by the City of Shanghai government on 29 September 201312, the financial
industry (including banking, insurance, securities, and asset management) was
specifically cited as having certain restrictions and conditions placed on foreign
capital participation. It will be interesting to see the extent to which these restrictions
on establishing Sino-foreign joint venture banks will be eased (or left unchanged) in
the Shanghai FTZ.
The CBRC measures also support the participation of private-sector capital inbanks, financial leasing companies, and consumer finance companies in the Shanghai
FTZ.

(2) Establishing partially licensed banks
It is possible that the establishment of partially licensed, rather than fully licensed,
banks is aimed at online banking. Together with the private-capital and Sino-foreign
joint venture banks noted earlier, new banks that do not adhere to the traditional
business model focused on deposits and loans could also be established.

(3) Some Chinese banks to be allowed to provide offshore services
Related to the liberalization of yuan-denominated capital accounts noted earlier,the State Council Notice removes the restriction in the Shanghai FTZ on Chinesebanks providing offshore services. In this case, rather than establishing the offshore
market within the Shanghai FTZ proper, we think it is envisioning a model closer tothat of the Japan Offshore Market (JOM), wherein trading is conducted through anoffshore account established within the financial institution. Also of interest is when
11

12

See http://www.cbrc.gov.cn/chinese/home/docView/ABF366775E64404EA78DD24FA73D7
D77.html (in Chinese)
See http://www.shanghai.gov.cn/shanghai/node2314/node2319/node12344/u26ai37036.
html (in Chinese)

7

Nomura Journal of Capital Markets Winter 2014 Vol.5 No.3

this privilege will be extended to foreign banks, although that probably will not
happen until Chinese banks have established a track record.
We note that the CBRC measures allow Chinese banks to establish new branches in
the Shanghai FTZ as well as upgrade existing business offices to branch or sub-branch
status. In step with this, the CBRC has indicated plans to allow business offices
expanded or upgraded within the Shanghai FTZ to operate outside the normal branchrules to ensure they are not subject to those rules' limits on establishing new branches
or expanding branches in a given fiscal year.

<Financial leasing>(1) Promotion of and tax breaks for the financial leasing business
The State Council Notice has eased minimum registered capital restrictions forleasing companies established in the Shanghai FTZ to lease a single aircraft or ship. In
China, the Measures for the Administration of Financial Leasing Companies(promulgated on 23 January 2007 and made effective on 1 March 2007) sets aminimum registered capital amount of 100 million yuan for leasing companies
approved by the CBRC, while the Measures for the Administration of Foreign
Investments in the Leasing Industry sets a minimum registered capital of $10 million
on foreign leasing companies approved by the Commerce Ministry. In step with aneasing of restrictions on establishing leasing companies in the Shanghai FTZ, some
tax breaks are also planned. In addition, financial leasing companies will also beallowed to engage in the factoring business (purchasing and then collecting on
Accounts Receivable). It will be interesting to see if these measures wind up
facilitating trading activity.
For nonbanks, the CBRC measures provide support for global corporations toestablish financing subsidiaries, auto financing companies and consumer financecompanies in the Shanghai FTZ, as well as for Shanghai registered trust companies tomove to the Shanghai FTZ and nationwide financial asset management companies toestablish branches there.

(2) Establishing foreign credit research companies
The entrance of foreign credit research companies, which research and administer
the credit histories of corporations and individuals, is interesting for its potential toencourage consumer finance and the supply of funds to growth sectors.

<Securities and futures brokerage firms>(1) Establishment of the Shanghai International Energy Trading Center
The CSRC, having indicated its agreement with establishing the Shanghai
International Energy Trading Center in its notice, has been preparing for trading in

Financial Impact from the Shanghai FTZ

8international crude oil futures and has agreed to the full participation by nonresident
investors in futures trading within China. This marks the first time for both the listingof crude oil futures and the participation of nonresident investors in trading on futures
markets within China.

(2) Support establishing securities and futures brokerage subsidiaries
The CSRC Measures support the establishment of securities and futures brokeragesubsidiaries in the Shanghai FTZ, and list specific examples of futures companies(Haitong Futures, Hongyuan Futures, GF Futures, and Shenyin & Wanguo Futures)
and asset management companies (Huaan Fund) that have either established, or are
preparing to establish, risk management and asset management subsidiaries.

(3) Support for OTC trading of commodity futures and derivatives
The CSRC Notice proposes to support the OTC trading of commodity futures andderivatives by domestic investors through securities and futures brokerage companies
in the Shanghai FTZ.

4. Why domestic and overseas financial institutions are interested
Both foreign and Chinese financial institutions have a strong interest in thespecifics of the financial services tests in the Shanghai FTZ, because the tests were
not initiated by the local government and approved by the central government, butrather are a national undertaking led by the central government, and thus FTZs could
be established in areas outside of Shanghai in the future. If that happens, then theexperience gained from participating in the Shanghai test could possibly infer anadvantage when participating in tests conducted in other regions.
The local press has reported that because of this, several foreign banks had been
considering establishing offices since before the formal opening of the Shanghai FTZ,
namely HSBC, Standard Chartered, and the Bank of East Asia. In fact, the Bank ofEast Asia has set up an internal team to look at its future business plan in the Shanghai
FTZ (according to an article in the 13 September 2013 edition of the Securities Times).
Ultimately, Citibank and Singapore-based DBS Bank received approval to open up
sub-branches on 29 September, the day of the Shanghai FTZ opening ceremony(Chart 3)13. After that, it was announced that both HSBC and the Bank of East Asia
had won approval to open sub-branches 14 . On 18 October, three foreign banks,
including Hang Seng Bank and Nanyang Commercial Bank, gained approval to open
sub-branches.
Among Chinese banks, on the day the FTZ opened on 29 September, the four
major state-owned banks (Bank of China, China Construction Bank, Industrial &13
14

See http://en.shio.gov.cn/presscon/2013/10/18/1152653.html
See http://cn.reuters.com/article/chinaNews/idCNCNE99D05A20131014 (in Chinese)

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Nomura Journal of Capital Markets Winter 2014 Vol.5 No.3

Commercial Bank of China, and China Agricultural Development Bank), the Bank ofCommunications, and Bank of Shanghai upgraded their sub-branches within the
Shanghai FTZ to branch status, and the China Merchants Bank and Shanghai Pudong
Development Bank gained approval to open new branches. The Bank ofCommunications' financial leasing subsidiary, BoCom Financial Leasing, also
received approval to establish a subsidiary within the Shanghai FTZ.
Of Japan's financial institutions, two in the banking sector, the Bank of TokyoMitsubishi UFJ and Sumitomo Mitsui Banking Corp., have established businessalliances with Chinese banks in the Shanghai FTZ (Financial News China dated 10
October 2013) 15 . All three of Japan's megabanks, including Mizuho Bank, haveindicated plans to open up offices in the Shanghai FTZ16. Additionally, SBI Holdings
announced a strategic alliance with Chinese firms (the Shanghai Lujiazui Group andthe New Hope Group) aimed at jointly developing an online financial business in the
Shanghai FTZ (10 October 2013)17.

5. Nonfinancial companies moving into the FTZ
A total of 25 companies received approval to establish companies within the pilot
FTZ on the day of the Shanghai FTZ's opening ceremony on 29 September (China
Securities Journal dated 29 September 2013). The list of 25 companies included twobusiness offices of insurance companies, two subsidiaries of futures and fundmanagement companies, one subsidiary of a private equity fund, and a trading
subsidiary (with no disclosure of type business) funded by a foreign bank (BNP
Paribas) (Figure 3).
There are several examples of nonfinancial companies having moved in ahead of
the opening of the Shanghai FTZ.
In one example of this from a Chinese company, the privately run solar cellmanufacturer Zhejiang Sunflower Light Energy Science & Technology announced
that it will establish a wholly-owned logistics subsidiary in the Shanghai Waigaoqiao
Logistics FTZ, which is inside the Shanghai FTZ18.
In a second example, this one a foreign company, US-based Microsoft announced
it will establish a joint venture with a local company in the Shanghai FTZ to
manufacture and distribute game devices and game software19. This joint venture isincluded in the list of 25 companies noted above. The import and sale of game devices
and game software had been prohibited in China since 2000, but the latest StateCouncil Notice removes the prohibition on the manufacture of consumer gamedevices and large game machines by foreign firms, and also allows their domestic
sales on an approval basis.
15
16
17
18
19

See http://www.financialnews.com.cn/yh/xw/201310/t20131010_42190.html (in Chinese)
Nikkei Shimbun dated 7 November 2013 and NHK dated 1 December 2013 (in Japanese)
http://http://www.sbigroup.co.jp/english/news/pdf/2013/1010_a_en.pdf
Nikkei Sangyo Shimbun dated 17 September 2013 (in Japanese)
Nikkei Shimbun dated 25 September 2013 (in Japanese)

Financial Impact from the Shanghai FTZ

10Figure 3: First group of financial institutions doing businessin the Shanghai FTZ
TypeChinesebanks

Financialleasingcompanies
Foreigncapitalizedbanks
Insurancecompanies
Fundmanagementcompany
Futurescompany
Privateequity funds

Form of entry

Financial institution name

Notes

Bank of China, China Construction Bank,
Industrial & Commercial Bank of China,
China Agricultural Development Bank, Bankof Communications, Bank of Shanghai

Upgrade fromsub-branch

China Merchants Bank, Shanghai Pudong
Development BankNew
establishment

Specialized
subsidiary

BoCom Financial LeasingNew
establishment

Sub-branches

Citibank, DBS Bank

Trade subsidiary

BNP Paribas

BranchChina Pacific Property & Casualty

Branch officeDazhong Insurance

Specialized
subsidiary

Huaan Fund Management

BranchesSpecialized
subsidiary
Investment
subsidiary

Shenyin & Wanguo Futures
Hony CapitalNewestablishment
Newestablishment
Change inexisting structureNew
establishment
Newestablishment
Newestablishment
Newestablishment

Note:
Financial firms in the Shanghai FTZ the day it opened on 29 September 2013.
Source: Nomura Institute of Capital Markets Research, based on the City of Shanghai
government and the China Securities Journal dated 29 September 2013

Moving forward, as trade restrictions are eased and as offshore transactions
become easier after they are allowed, we can envision the possibility that global firms
will start using the Shanghai FTZ as their regional headquarters in growing numbers.
In fact, the State Council Notice deepens tests of the concentrated management offoreign currency funds and proposes policies to encourage global companies toestablish local or global funding management centers. The CSRC Notice also supports
the domestic issuance of yuan-denominated bonds by the overseas parent companies
of foreign firms with operations in the Shanghai FTZ. The domestic issuance of yuandenominated bonds by nonresidents (Panda bonds) has only been authorized thus far
for international development financial institutions (the IFC and ADB). Whether theseries of tests, along with reforms of the Shanghai FTZ's external debt management
model, which relates directly to obtaining funding from overseas, make it easier for
global companies to manage their cash will be a key determinant of whether global
companies choose to set up their regional headquarters there.

11 Nomura Journal of Capital Markets Winter 2014 Vol.5 No.3

III. Role of and outlook for the pilot FTZ
1. Events leading up to establishment and operation of the pilot FTZ
The establishment and opening of Shanghai's FTZ can be traced back to both
domestic and overseas factors.

1) Domestic factors
Seeking to change the growth model from external demand and investment driven
to internal demand and services driven in the 12th 5-year plan (2011–2015), China's
new government seeks to "upgrade" the Chinese economy. We think it wants to kickstart this upgrade by establishing a pilot FTZ in Shanghai to run tests in the trade, FDI,
and services sectors.
Meanwhile, the City of Shanghai has been promoting the concept of aninternational finance and logistic center 20 , and China's new administration, having
decided to use the CCP Central Committee's 18th Third Plenum held in November
2013 as a launching pad for the CCP Central Committee and State Council to lead aneffort to change China's growth model, is promoting the Shanghai FTZ as thecenterpiece of that effort.

2) Overseas factors
The new government apparently wants to use both bilateral and multilateral free
trade agreements (FTAs) to enhance China's growth strategy. They will be using
venues other than the WTO to ensure China's economy benefits from globalizationand to use negotiations for joining these FTAs as a lever to achieve domestic reform.
Within the Asia-Pacific region, China has already concluded an FTA with the 10
countries of ASEAN (ACFTA), and negotiations are proceeding on the multilateralfront with the RCEP (Regional Comprehensive Economic Partnership; for East Asia)
and Japan-China-Korea FTA, and on the bilateral front with the China-Korea FTA.
Meanwhile, progress with the Transpacific Partnership (TPP), which China is not apart of, has created the risk for China that it will be left out of an important framework
for liberalizing trade and investment in the Asia-Pacific region.
In fact, on 30 May 2013, the Commerce Ministry announced prior to the US-China
Summit that it would analyze the advantages/disadvantages of participating in the TPP
and the potential for doing so. Because China will not immediately satisfy therequirements for participating in TPP negotiations, we think it wants to use the pilot

20

See Eiichi Sekine, Reaffirmation and Reinforcement of Shanghai's Future as an
International Financial Center, Nomura Journal of Capital Markets, Spring 2012.

Financial Impact from the Shanghai FTZ

12FTZ to sound out the potential for TPP involvement. For the time being, negotiations
should proceed between the US and China on an investment agreement21.

2. Future outlook
Word has it that when the various government ministries were in the process of
discussing the Shanghai FTZ, Premier Li Keqiang used his political muscle to squash
opposition to the concept (China Economic Weekly dated 10 September 2013). In fact,
we think the new administration, which included construction of the Shanghai FTZ
while raising the flag of reform at the 18th Third Plenum in November 2013, will
make this a long-standing theme over the next decade. China's domestic financial
sector also has well entrenched expectations that the financial services tests in the
Shanghai FTZ will accelerate the liberalization of yuan-denominated capital accounts,
i.e., the globalization of the yuan.
Political developments since the Third Plenum include, first of all, the People's
Bank of China announcing on 2 December 2013 their "Opinions of the PBC on
Financial Measures to Support the China (Shanghai) Free Trade Zone 22 ," which
proposes 30 measures related to the direction of the tests of financial liberalization
already announced by the State Council, CBRC, CSRC, and China Insurance
Regulatory Commission (CIRC) ("the PBC's Opinion on 30 Measures"). Second, theCity of Shanghai government established a group to promote cooperation in the
Shanghai FTZ's financial sector. Third, the Shanghai Bureau of the PBOC indicated itplans to implement the majority of the 30 measures over the next three months (byMarch 2014), and over roughly the next year to build a financial administration modelthat can be replicated and promoted nationwide23.
Meanwhile, Hong Kong already has an offshore yuan market, and a test for crossborder yuan-denominated loans in the Shenzhen Qianhai district adjacent to Hong
Kong was launched in January 201324. Other major cities/regions have already begun
expressing an interest in becoming the next pilot FTZ after Shanghai, including
Tianjin, Chongqing, Guangdong province (Hengqin, Qianhai, and Nansha), andTsingtao. There are reports that Guangdong province has already filed an application
with the State Council (China Securities Journal dated 15 October 2013). Includingthese domestic initiatives, the focus will initially be on the content of the tests being
run in the Shanghai FTZ and their cumulative results.

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See Eiichi Sekine, Daigoukai Beichuu Senryaku Keizai Taiwa kara Miru Chuugoku no
Kin'yuu Kaikaku ni Muketa Tenbou (Outlook for financial reform in China based on theFifth US-China Strategic and Economic Dialogue), Fall 2013 (Website edition), CapitalMarket Quarterly (in Japanese).
See http://www.pbc.gov.cn/image_public/UserFiles/english/upload/File/FTA2.pdf.
See http://shanghai.pbc.gov.cn/publish/fzh_shanghai/2974/2013/20131203203424945282322/
20131203203424945282322_.html (in Chinese)
See Eiichi Sekine, "Start of Chinese Experiment in Financial Deregulation," Summer 2013,
Nomura Journal of Capital Markets.

13 Nomura Journal of Capital Markets Winter 2014 Vol.5 No.3